A commodities futures contract is traded on major derivatives exchanges, and enables the buyer to theoretically take delivery of that commodity from one of the exchange’s warehouses.

Luckily, using spread betting or Contracts for Difference, you won’t need to worry about that, but your broker or market maker will be quoting a price which will move in close relation to the price of the underlying contract. Hence, you might see ‘Brent Crude March 2019’ quoted on your trading screen. This will typically be the next futures contract to expire.

Sometimes you will see more than one contract quoted. The number of contracts available will differ from commodity to commodity, as some are priced for regular delivery, like oil, while others are subject to annual or semi-annual harvests.

The commodities spot price is becoming more frequently used by some brokers. This is the price today, for delivery in the very near future. It represents the more immediate price of a commodity, and is also referred to as the ‘cash’ price. If you just want to trade a commodity on a day to day basis, without having to worry about the differences in price between futures contracts, the cash price may be a better option.

Finally, the introduction of commodity-based Exchange Traded Funds (ETFs) has also made it possible to trade commodities like you would company shares. ETFs will seek to track the performance of a particular commodity, either by holding the physical asset (some ETFs hold gold on deposit in vaults, for example) or by purchasing commodity futures.

Be aware that you are exposed to the price of the ETF, not the cash commodity price, and the two can diverge over time as the costs of managing the ETF impact its performance.

Share this article

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

Advertisement

Risk Warning

All financial investments involve an element of risk. The value of your investment may fall as well as rise and you may get back less than your initial investment. With Spread bets and CFDs your losses may exceed your deposits.

Our Mission

Our mission is to educate and inspire private investors. With greater access to the financial markets than ever before, we'd like to see everyone use the markets to grow their wealth and gain long term financial independence